If you’re looking into an IUL policy, one of the first things you’ll receive from your financial professional or the insurer is the policy illustration. At first glance, it might seem like a great roadmap showing potential growth, loan options, and future cash value. But here’s the catch: Those numbers aren’t guaranteed.
An IUL illustration is basically a snapshot of how your policy might perform under certain conditions. It’s a helpful tool for seeing different scenarios, but it’s based on assumptions, not predictions. Things like how much you pay in premiums, how the market performs, how loans are handled, and what internal fees apply all play a role in shaping those projections.
Whether you’re considering an IUL or already have one, understanding how to read and interpret these illustrations can help you make smarter choices and avoid surprises later on. So let’s break down what these illustrations are, how they work, and what you should be paying attention to.
What Is an IUL Policy Illustration?
An IUL policy illustration is basically a detailed “what if” guide from the insurance company. It’s meant to give you an idea of how your policy could perform over time. You’ll see things like how much cash might build up tax-free in the policy, how much your loved ones could receive income-tax-free when you pass away, how much you might be able to borrow tax-free from it later, and what your premium payments might look like, all based on a bunch of estimates.
But here’s the important part: This document is not a promise of exactly how your policy will work. Instead, it’s showing you different possibilities, depending on things like how the market does and how you use the policy.
For example, your illustration might show what things could look like if the policy earns 6% interest every year. That number is based on past market performance, not a guaranteed return. Some years could be better, some worse. And even if the market goes down, your policy won’t lose money due to market volatility, thanks to the 0% floor. But you still have to pay fees and charges every year, and those don’t go away just because the market’s having a rough patch. That means your cash value can still shrink in a bad year.
So, while the illustration is a helpful tool to get a sense of what might happen, it’s important to take it with a grain of salt. Think of it like a weather forecast; it can help you plan, but it’s not always entirely accurate.
What to Pay Attention to in an IUL Illustration
When you’re looking through an IUL policy illustration, there are a few key sections that are especially worth understanding.
First, you’ll see two sets of numbers: one under a “guaranteed” column and another under “non-guaranteed.” The guaranteed column shows a very conservative scenario. It assumes the policy earns the lowest possible return and that costs are as high as allowed. This gives you a sort of worst-case view. The non-guaranteed column shows a more optimistic outcome based on current market assumptions. Just remember, even though the numbers look better, they’re not promised—they’re just what could happen if things go as expected.
You’ll also notice some info about borrowing money from your policy. There are a couple of different loan options you might see, like Zero Cost Loans (also called “Wash Loans”) and Index Loans (also called Alternate Loans). With a Zero Cost Loan, what you are charged in interest on your loan amount is the same as the interest the same loan amount earns, so it balances out. With an Index Loan, you might pay more in interest, but there’s also a chance to earn more if the market performs well. If the market has a bad year, though, you could earn nothing on that borrowed money while still paying interest.
Lastly, keep an eye on the fees and charges listed in the illustration. These are the costs the insurance company takes out of your policy, and they don’t go away even if your policy grows. Some of these charges may go down over time, while others might go up. If your policy doesn’t perform as well as expected, or if you don’t keep up with your payments, those fees can start to eat away at your cash value. In the worst case, the policy could run out of money and lapse.
So while the illustration is full of helpful information, it’s important to read it with a critical eye. It’s a tool to help you understand possibilities, but it is not a guarantee of how things will actually play out.
Why You Shouldn’t Treat the Illustration as a Promise
It’s tempting to look at a 30-year IUL projection and get excited by the big numbers showing up in the future. But those numbers aren’t set in stone; they’re just possibilities based on current assumptions. If you expect your policy to hit those targets no matter what, you might be setting yourself up for disappointment. While your policy can grow over time, there’s no guarantee, especially in years when the market is shaky. Even if your earnings are flat, the policy fees keep coming out.
Think of the illustration more like a rough outline than a crystal ball. It gives you a framework to see how different funding choices might affect your cash value or how taking a loan could reduce your death benefit. But the actual results will depend on many moving parts, like how the market performs and whether the insurance company changes things like cap rates or participation percentages.
One more thing to keep in mind: these illustrations usually don’t show what could happen with taxes if the policy doesn’t go as planned. For example, if your policy runs out of money and lapses, or if it’s set up the wrong way and turns into a Modified Endowment Contract (or MEC), you could end up owing taxes, sometimes a lot. It’s kind of like thinking you’ve got a tax-free savings account, only to find out later that you’ve triggered a tax bill you didn’t expect.
That’s why it’s really important to work with someone who knows the ins and outs of IULs, especially someone familiar with your state’s regulations. Imagine you live in Utah and are trying to use your IUL to supplement your retirement income or leave a tax-efficient legacy for your family. A knowledgeable Utah IUL professional can help you structure the policy the right way from the start, keep it running smoothly over time, and help you avoid any unexpected tax issues or policy lapses down the road.
How to Use the Illustration to Your Advantage
The real value of an IUL illustration is that it helps you see how different choices might play out over time. For example, if you want to pay more into the policy during the first 10 years, the illustration can show how that could boost your cash value later. Or if you’re thinking about taking loans from the policy, it can show how that might lower the death benefit your family would receive if you pass away.
You can also use the illustration to test different scenarios, like changing the interest rate, choosing different index options, or comparing loan types. A good advisor can run a few versions for you: one with conservative numbers, one with middle-of-the-road estimates, and one that’s more optimistic. That way, you can compare them and get a better idea of what to expect in different situations.
Let’s say your goal is to use this policy to supplement your income in retirement. The illustration can help you figure out how much money might be available for loans, and what trade-offs come with that. It’s a helpful tool to plan ahead and make smarter choices based on your goals.
Consult a Trusted Advisor
An IUL policy illustration is a powerful tool, but only if you know how to interpret it. It’s not a contract or a guarantee. It’s a visual roadmap that shows you what could happen, depending on how you fund your policy, how the market behaves, and how the insurer adjusts rates and fees over time.
Your job is to use this information as a guide, not a promise, and to work with a trusted IUL professional who can walk you through the assumptions behind the numbers. That way, you can build a strategy that fits your life, prepares you for both the highs and the lows, and helps you make informed decisions every step of the way.
Don’t let a stack of charts and numbers confuse you. With the right understanding, your IUL policy illustration can become a key resource in your broader financial plan, helping you visualize not just what’s possible but what’s truly sustainable.